Conference Transcript - TD 2026-03-11

Speaker 2

Kelvin Tran, the CFO of TD. Kelvin, welcome again to the to the conference. Thank you for coming.

Kelvin Tran, CFO

Thank you for having me. Great to be here.

Speaker 2

So as per usual, what we've been sort of, I've been sort of highlighting for everybody is, you know, Canadian banks just recently reported, so we'll do a lot of follow-up on what we just saw in the quarter. And I think in your case, one of the things that I constantly get asked about is loan growth. You know, it's, it's a function of, you know, all bank, U.S., Canada, but essentially the question that I keep getting is when we look at your loan growth in 25, it was relatively light, below the peer median growth, and a lot of people want to know a little bit more about how you see loan growth evolving over the course of 26, and in your case in particular, because you know you have a strong position in Canada, people are quite interested in the mortgage market, and you know what kind of housing market do you need for much stronger mortgage growth so why don't we start with the loan growth question and i'm sure it will evolve from there but over to you how do

Kelvin Tran, CFO

you see it evolving over 20 2026 sure sure thanks for the question good afternoon everyone um yeah so why don't i just uh help you uh unpack the the canadian story versus the u.s story and talking about how how we see our results um so for q1 uh this year we're very pleased with our canadian loan growth if you look at the detail for the mortgage business which is rezzo we call it volume grew more than five percent year over year and that's on the back of a relatively challenging mortgage market what we've laser focused on is growing the originations of our proprietary channels right that's a more profitable channel stick here and it proves that and our originations there is a double-digit year-over-year so it proves that our specialization strategy is working and our refinement of our referral model between the branch and our mobile mortgage specialist is working as well so very pleased about that the other asset class that we're very focused on is credit cards and for those in Canada volume was up seven percent year-over-year and we look at active accounts and those were at record levels and still growing at five percent year-over-year so those are the leading indicators of future growth that you're talking about so that credit card business is that like new accounts do you mean or those are active accounts and So those would, if you grow your active accounts, and over time, they'll build more and more volume. And so they're at record levels, and still growing 5% year over year. And then on the business loan side, that is up 6% year over year, despite a fairly uncertain macro environment, as you know, in Canada. So overall, very pleased with the results of our Canadian businesses. And then on the US business, as you know, we've worked really really hard on restructuring our balance sheet over the last year because of the asset cap we're very focused on creating 10% of balance sheet room so that we could continue to support our customers our clients and there on loans or businesses that are less profitable we exited them either by selling loans or by putting them in runoff mode so when you look at that year over year that is impacting year over year loan growth excluding those runoff portfolios we're really looking at core loan growth growing two percent year-over-year but if you look underneath that on the areas that we really like like in our proprietary bank card portfolio that is up 15% year-over- year and other areas that we really that we really like for example is the commercial middle market business where we have synergies with TD Cowan we like that space we will continue to double down on that so overall you know that's the environment we're very pleased with that on both sides of the border given how we perform in the two percent long growth X runoff is fairly much in line with the US market and and can you speak to what you're seeing in terms of spreads for all of this loan growth and we do see your your net interest margin

Speaker 2

certainly in the US has had a very big ramp up and I know you can talk a little bit more about the NIM expansion that you've seen and what you're expecting going forward but can you talk about the spreads that you're seeing on these loans?

Kelvin Tran, CFO

Yeah loans are our loan spreads are good and like we talked about over our strategy deployment per investor day we're much more disciplined in terms of ROE threshold when we issue these loans and so therefore you do expect loan margins to be better than what they used to be plus the fact that working with TD Cowan it's going to generate fee income as well so it's not just on the NII growth but also fee income growth whether it sits in TD securities or in US banking.

Speaker 2

You know in a couple weeks ago when I was fashioning these questions I was thinking about possibly lower rates I don't know if that's the case anymore but if there was a change in interest rates in the US how should we think about your margin well again depends on the week that you're asking me this question two weeks ago maybe two to three rate cuts now seemingly potentially no rate cuts depending on who you're listening to I would say the direction of the last two weeks with less rate cuts gonna be a tailwind and beneficial to our margin in the u.s. yeah that's what I figured and maybe just to wrap up the balance sheet growth deposits you know how do we see that evolving you what we saw in Canada was a lot of term deposits sort of running off, are we near the end of that and can you talk about deposit deposit mix and how that's affecting your margin?

Kelvin Tran, CFO

Yeah I mean absolutely right several years ago when rates were really high you see a migration of core deposit checking deposit to term and it's been a while now that consistently every quarter term deposit is coming down it's going into core deposit which which we like.

Speaker 2

So one of the things that I get asked a lot about is TD's stance on costs. And it became very clear at your investor day that you were going to be laser focused on costs over the course of this time. Now one of the things that you guys did was a fairly large restructuring charge, savings of $775. Those are pre-tax numbers, by the way. And some of that, you know, $400 million and run rate cost savings is reaffirmed. I guess the question is, where have you been successful in reducing costs thus far in 26? And where could you maybe accelerate, maybe in 26 and into 27, as people think about your efficiency targets and your operating leverage targets?

Kelvin Tran, CFO

Sure, sure. So you're right. On Investor Day, we talked about costs take out of about $2 to $2.5 billion. We have six levers where we could pull and then more specifically by business segment, you would see a higher proportion of cost savings coming from the wholesale banking business and also U.S. banking. But all businesses would, it's expected to contribute to that. And some are public, you've already seen it, like in Q1 we announced store closures in U.S. banking, that's part of our distribution transformation lever but there's also procurement ai automation as well and what ray talked about and the management team is very focused on is reducing structural costs it is looking at unit costs how do we wake up every day just grinding down that cost a day in day out and so you look at rezzo we talked about that how do you drive that we did 20% or more savings from just education funding and discharge through automation and AI and then even in claims and insurance well how do you drive claims costs down and prevent fraud in claims on the procurement side it is about both driving down volume which is demand management like how do you prioritize your activities to drive down demand but also for unit costs right so it's volume times cost, and given our purchasing power, we continue to negotiate with the power of our franchise, and one recent win was looking at a very large contract on a North American basis, and driving down significant savings through that renewal. And those are structural unit cost savings, because those are vendors that we use on a continuous basis, and so that would drive down unit costs. And so very pleased about all of those levers that we have.

Speaker 2

And what's the, I mean, what was interesting, we had one of your peers up here was talking about a sort of a bit of a philosophy. Do you guys kind of have a philosophy on, okay, we've driven down, I don't know, I'll pick a number. How about, I've driven down $775 million pre-tax of costs. And, you know, part of that's going to go towards reinvestment in AI or what. Is there a general philosophy at TD in terms of reinvestment and specifically into AI? Because there's probably going to be some follow-ups. AI has been very topical here.

Kelvin Tran, CFO

Yeah, we look at AI as one lever as any, so no specifically that we have to do that or not. It is all depending on the business case, and this year where we guided to is expense growth of 3% to 4%, and that's audit, so meaning we're investing in the business, investing in areas where it would drive future growth, net of then productivity savings. Yeah, I mean, your expense growth was up 7% year over year, and a bit ahead of your I think your longer-term guidance you know so does it when do you think it moderates this year is it a back half story just like credit or is this something that can happen relatively quickly right so if you look at our expense growth we're already bending the expense growth curve seven percent is the lowest expense growth in the last six quarters right and you would see that expense growth continued to come down as we I would say implement these strategies and these levers quarter over quarter.

Speaker 2

Okay and maybe just shifting gears now to credit credit quality because had a little bit of you know there's a few things out there on private credit that's hitting the markets recently so I didn't want to touch on maybe just that first before we dive into some specific can you speak to private credit exposure at TD and just Just give everybody a general idea of how you view the issues that we're seeing today in the private credit space.

Kelvin Tran, CFO

We don't have big exposures to private credit, around 1%. So nothing that we would call out or be concerned about.

Speaker 2

And how is it, what does it mostly consist of, or is it very diversified by industry sector?

Kelvin Tran, CFO

Yeah, it's quite challenging.

Speaker 2

So then looking at your ACLs and your existing, and your PCLs that we recently saw, first and foremost, I think one of the things that everybody's really nervous about is that is the upcoming discussions on USMCA. Now we've got oil, high oil sort of some volatility around that. Can you maybe discuss how we should think about provisions for credit losses sort of playing out for the rest of the year?

Kelvin Tran, CFO

And maybe give us a range like how, I mean everybody, every Canadian bank is suggesting that provisions for credit losses are going to fall in the back half of the year why is that particularly true for your for your bank yeah so number one our guidance for PCL ratio is 40 to 50 basis point this year we haven't changed our guidance despite despite the fact that there are changes in macro environment and that's down from 45 to 55 basis point of last year so that's an improvement year-over-year in terms of our coverage ratio we're at 99 basis points so we feel very comfortable with that and within that 99 basis point is inclusive of over 500 million dollars of tariff and trade policy related risk reserve so we feel comfortable with that number because the way we go about it is actually looking at various scenarios that could play out given the information that we have now plus we also do a bottoms-up file by file review on the non retail portfolio and so that gives us confidence and a good understanding of where the risk resides and we continue to be comfortable with that number and then on top of that we do stress testing on

Speaker 2

different possible scenarios that could come up and so nothing right now tells us that we need to change that number and when you do this file-by-file review how much of a how much of a future look can this actually play out for you as I Typically, I remember the old adage, you know, we really only have a view on this credit about six months. Is that a fair assessment?

Kelvin Tran, CFO

I would say it's more than six months. But, yeah, you have to look at the customer, their geography, the industry they're in, how vulnerable they are in terms of financial situation, but also to the shock that you're seeing in the market. And you take that all into account, you stress them not just of downgrade differently and then you go, okay, well, what is your exposure? And then using some expert judgment overlay on top of that.

Speaker 2

And so what do you tell investors that ask about, you know, this small creep up we see in the consumer delinquency statistics across all Canadian banks? Why is that not allowed?

Kelvin Tran, CFO

Why is that something that's not concerning the bank? because we expected that to happen and so in when consumers are under pressure which they are you do expect consumer credit to deteriorate and what you expect to first go would be credit cards and auto and you're seeing that playing out and when we look at our models is playing out fairly much as what we expected and so therefore from that perspective we're not concerned and we would expect continued pressure in that in those category throughout 2026 okay so that's not a function that's not what's going to help your PCL in the back half of the year well we were not one of the banks that said back half first half we say the 40 to 50 basis point and I think in Q1 it was 43 basis so you're still within the range for the rest of the year exactly okay and how should we think about it or have you thought about discussing your longer term loss ratio well there's so much depending on the macro environment but what makes us feel good about it is when we look at the credit quality of our book it is strong and that gives us comfort we haven't seen anything that causes us concern and with the five hundred million dollars of reserve we feel very comfortable so one of the other things that really sets you apart versus your peers is an extraordinarily high level of capital and a very active buyback program. Good place to be in, right?

Speaker 2

Yeah, no absolutely, there's no harm there. So last year you returned a lot of capital, this year I think you committed to about seven billion of return capital. The issue that I have is I can't model down your common equity tier one ratio even after that large outlay. So realistically where could we expect your common equity tier one ratio to land at the end of the year? And is this a burning issue for you? Do you guys feel like it really needs to come down to 13? And I know you guys want to, but is it realistic for us to see it? Right, right.

Kelvin Tran, CFO

And so one of the governor is ROE. We're very focused on driving ROE growth. We want ROEs to get to 16% in 2029, and hopefully even sooner and so that's the the amount of capital excess capital matters because that's the denominator and when you heard us talking about it on invest today is that we are disciplined in deploying our capital right we're deploying our capital organically because that is the highest return that we that we get and that would drive earnings growth which would then comes with higher dividends because we have a payout ratio that we want to stay with within 40 to 50 basis point and then if there is any excess capital bearing any additional use usage we will return that capital consistently back to our shareholders and that what we said and that's what we were gonna do and our goal is to get to 13% CT1 by the second half of 2027 and if that means that we need to launch another share buyback after this one we will consider it obviously subject to approvals and market conditions and whatnot and we're not shying returning capital that way and and you know the question that I get from a lot of investors is you know I mean at some point does the stock price stop you from buying back your stock well if you ask whether I care about what share price I buy back the stock I do care we're using shareholders money to buy back our stock but if you look at the increase in the stock price is just a reflection of our strong execution and so we believe that we continue to so don't look backward but look forward continue to execute on our execute on our strategy we will continue to drive earnings growth we will continue to drive ROE growth and that would be further reflected in our share price so we will be continued to be comfortable in doing that and so is it possible Kelvin that I don't have enough RWA growth built into the model because I can't get your common equity tier one ratio down to I think I still I can't remember I think I've got it like almost 14 by the end of 27 so it's really hard to grind it down is it is there a potential for our WA inflation here or what am I missing on that no I think it's just a good problem to have like I said we just spin off so much organic capital but if there's a need we're not shy returning capital back to our shoulders through share by bank I I will take questions from the audience, so don't be shy.

Speaker 2

If anybody wants to ask a question, please go ahead and raise your hand. Kelvin doesn't mind either, right? By any means, no. If there's no questions, we'll march on. It's been a really strong capital markets kind of environment. We've had a lot of volatility in the markets, a lot of client activity, a lot of business. several several of the Canadian Bank CEOs, CFOs have all told me like they were a lot of momentum bleeding into 2026. Maybe you can give us a view and maybe give us a reminder on what it is that you're trying to accomplish with TD Cowan.

Kelvin Tran, CFO

Sure, so I agree with that view. If you look at 25 there was good momentum going into Q1 and then Q1 now going into Q2. The market generally continues needs to be constructive though last two weeks there's quite a bit of volatility we'll see how that plays out over time it's early days but you're right if you look at Q1 our results were very strong earnings of 560 million dollars up 65 percent year-over-year record revenue of 2.5 billion dollars and that's the combination of efforts that we spent it's a multi-year effort in investing in wholesale banking we like that business we want it to grow and TD Cowan filled the gap that that we had and with the successful integration and the continued building investment in prime services or global transaction banking we see a lot of potential with wholesale banking now when you step back what's interesting is we do talk about a good macro environment but if you look at the last year they're actually quite different quarter to quarter because they're not it's not a the exact same environment over time in some quarters fixed income is stronger some quarters equity equity is stronger some quarters advisory is stronger and even in q1 it was commodities but precious metals and now Q2 seems like commodities but oil and so to be able to perform in different markets just shows that we've built a diversified business that could capture opportunities when they arise and so I feel really good about that. Is the build over?

Speaker 2

Is there verticals that you need to work on?

Kelvin Tran, CFO

You know there's no major gaps but like I talked about Prime Services we're launching a few products do more to go but also global transaction banking is on its way but a lot of the investment have been made already but still some to go you know it's interesting the the global transaction banking I mean you hear it a lot everybody's building it and working on it is getting is it getting like to be a crowded space which you know I don't think so like if you look at global transaction banking in my oversimplified world it's just the equivalent of the deposit business on the retail side right it's help but it's helping corporate and so those are sticky deposits that you'd like you're servicing the customer helping them with cash management so all these very similar to retail on the on the court checking the deposit we like that business we like the space and not getting competitive everything is competitive Darko fair enough but I mean increased competition right but I think increase competition is good but we were strong and we're up for it all right let's go and one other thing I mean it's now been how many years that Cowan's been in the fold and I think we're past the point where people were once concerned that there were sort of handcuffs on on employees and like where are we in that journey well what I would say is what we find is that you have to have the right culture to begin with and we do spend a lot of time looking at cultural fit when we first acquired TD Cowan and then at the end of the day people want to work for a winning bank and people want to work for a bank that did building something together it's exciting when you're building something together that's what we're we're we're being told for people who are from TD account but also people that are now joining the wholesale bank and say we see that you are committed to investing in this franchise we see that you're building something special here we want to be part of it and so I think like what's not to like yeah and I guess maybe just draw the link between TD Cowan and the US Bank I mean I think that's the the one thing that I think a lot of people really want to get a little bit more firmer in their mind in terms of the opportunity set sure like so if you look at our u.s. banking business they deal with small business and middle market clients and TD Cowan that is their sweet spot from an advisory perspective but before when TD Cowan was on their own they didn't have a balance sheet so this is like a perfect marriage where we have a balance sheet in US banking we didn't have the capabilities that the expertise that TD Cowan would bring in and now there's there's really good synergies from a booking point perspective is a little bit different right because you see some of the fees that go into wholesale bank were so it's slightly different but at the end of day I see this as one big bank one big TD bank and how we are servicing our clients and are I mean we seen tangible results or is this still more of an opportunity no there's tangible results and then but some of these relationships are multi-year relationship you build the relationship it doesn't mean that there's a there's an opportunity right right away for them but if you service them well and then

Speaker 2

you build that relationship you build that trust it's just a matter of time and so another question that gets lobbed at me and it's you know it's not one that I like to think about too much is darker what is your absolute best case scenario for TD and the asset cap you know when could it come off maybe you can give us a bit of an update on the AML or work that you've done and just give a reminder of kind of that asset cap and sort of the the parameters around it sure sure just high level we're making good progress on the AML remediation we tried to be as transparent as we can so in the investor deck that you see we talked about what we've been able to accomplish this

Kelvin Tran, CFO

quarter but also what to expect next quarter and so this way next quarter if we say hey we're missing something then you know whether we're on track or not and that's the transparency that we want to provide in terms of the asset cap we were so laser focused as you know when we when we had the uh global resolution back in 2024 immediately we announced how we're going to create the capacity and that was really important for us it starts not just a numbers game but our clients want to know that we are there for them and we want to be able to tell them right away this is our strategy look at our execution and the execution was really really strong creating 10% of balance sheet room so we're very comfortable that we have enough room and we have additional levers we wanted to pull in servicing our clients so from an asset cap perspective uh we really like the space where we're at today okay great um you mentioned earlier that you had some success with your credit card business you think is it 15 growth yeah bank card in the us that's right but on the flip side you just did something with nordstrom so maybe you can talk about the the changes um what are the financial benefits we should think about with the changes and more and the business case too maybe you can sure sure sure um stepping back we just like the credit card space the good space not easy you have to have scale you have to have data so they can manage the risk proprietary bank card is important because it helps us deepen relationship with our existing customers on the stores the branches and then the partnerships are important because we can leverage on their customer relationship to help us build scale and this is just another evolution of that building scale because we now have taken over the servicing of Nordstrom's clients right so full service provider and so we've taken that over from Nordstrom that required us to add people a little bit of system but that shows the importance of the strategic importance of this asset class that we're committed to this partnership we're committed to investing in this business and this is what we know what to do like this is our space and it helps us build scale and the benefits are with Target and Nordstrom is a revenue sharing and credit risk sharing agreement and so by taking this servicing over we will take a bigger share of revenue but also expect the credit losses but net net is a benefit to the bottom line.

Speaker 2

So it's a it's an overall better benefit but now you're participating in some of the credit risk.

Kelvin Tran, CFO

We always participated in the credit risk but it was a different percentage. Okay right but yeah so let's so I'm making it up here so let's say it used to be 90-10 we had 10% now it's like 80-20 right so we just have more revenue but also more expected credit losses but overall the revenues we expect to be higher than the credit losses and so therefore you make more money out of the deal.

Speaker 2

So that was Nordstrom the obvious question is target or is this something that you and is this a commercial for more of these kind of relationships?

Kelvin Tran, CFO

We like the space we think that we could we could operate this more efficiently and so we've done it now with Nordstrom it was converted this quarter and so with scale it's just going to be more profitability for us okay we're coming up to the end of our time together maybe you can give us a couple of key takeaways of the that you'd like to leave with investors sure well thank you for having me I always enjoy this conference we're very pleased about the execution that you've seen so far we've laid out our strategy and invest today and what we're asking our shareholders to do is trust us we will do what we said we would do if you look at q1 that is playing out as we expected and you know our we're committed to delivering the financial targets and the strategies that we've laid out on the rest of it okay that's it thank you so much great thank you